Anderson v. Commissioner of Internal Revenue

• Decision Date: 30 December 1957
• Docket Number: No. 16624.,16624.
• Citation: 250 F.2d 242
• Parties: Lewis Thurston ANDERSON and Clyde Velma Anderson, Lewis Thurston Anderson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

250 F.2d 242 (1957)

Lewis Thurston ANDERSON and Clyde Velma Anderson, Lewis Thurston Anderson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16624.

United States Court of Appeals Fifth Circuit.

December 6, 1957.

Rehearing Denied December 30, 1957.

COPYRIGHT MATERIAL OMITTED

L. Eugene McNatt, Atlanta, Ga., Thomas R. Spillane, Savannah, Ga., Cuba, Cuba & McNatt, Atlanta, Ga., of counsel, for petitioners.

Charles K. Rice, Asst. Atty. Gen., Ellis N. Slack, Atty., John N. Stull, Acting Asst. Atty. Gen., Nelson P. Rose, Chief Counsel, Int. Rev. Service, Rollin H. Transue, Special Atty., Washington, D. C., Lee A. Jackson, Harry Baum, Melvin L. Lebow, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and TUTTLE and WISDOM, Circuit Judges.

TUTTLE, Circuit Judge.

This petition for review of a decision of the Tax Court in these consolidated cases involving income tax liability for the years 1942 through 1948, and certain additions to the tax for several of the years, presents primarily a series of fact issues. These are whether the deficiencies ascertained by the increase in net worth method of computation are supported in fact by the record, whether the assessment of the fraud penalty for some of the years was justified and whether the determination that the failure to file a return for 1947 was due to wilful neglect rather than reasonable cause is clearly erroneous.

Other questions involving mixed issues of law and fact or law alone must also be disposed of.

Briefly stated, the taxpayer was engaged during the years 1942 through 1946 as a watchmaker as he had been for many years previously. He worked for wages varying from $55 to $70 per week. He filed income tax returns for all the years in issue except for 1947. Beginning long prior to the tax years taxpayer had begun acquiring small properties consisting principally of cheap residential property which he kept up largely himself and rented to tenants of low income groups. He continued to acquire land and houses and to build small poorly constructed dwellings both for rent and for sale during certain of the tax years. He also acquired some farm acreage and timber lands. Towards the end of the period (from 1945 to 1948) his holdings in securities increased from $10,369.81 to $26,436.00. He owned security deeds secured by real estate sold by him on small or no down payment and for small monthly payments in the following face amounts for the years in issue:¹ 1942, $4,863.62; 1943, $6,440.51; 1944, $6,587.15; 1945, $43,795.64; 1946, $58,907.48; 1947, $127,562.28; 1948, $165,899.92. During the same period his ownership of land at cost was as follows:

                  1942        $69,929.77
                  1943         71,578.80
                  1944         88,486.30
                  1945         61,348.52
                  1946         48,150.34
                  1947         38,737.78
                  1948         36,523.89
                

The taxpayer's cash on hand and other assets increased moderately, as did his indebtedness.

It was apparent from the most cursory search that there was a substantial increase in taxpayer's net worth during the period that was not reflected in the annual returns filed by him.

The taxpayer kept no books of account from which his income could be even approximated. He did much of his dealings in cash and destroyed all cancelled checks. The investigation of the seven years commenced with a conference with revenue agents in June 1947, when they were investigating his 1944 return. At this time, on request of the agents for records of income and expenses he furnished them with three notebooks one of which purports to contain records of sales from 1943 to 1945, another bore the caption "Income Tax Book — 1944," and the third has written on the cover "1946 to * * *." Two of three books are in evidence and contain entries concerning sales of numerous parcels of real estate. The entries include the names of the purchaser, the street name and house number of the property, the amount of the loan and payments made by the purchaser. In some instances a cost figure is shown; in others it is not. The book captioned "Income Tax Book — 1944" is not in evidence. The agents made a transcript of the books and returned them to the taxpayer on January 30, 1948. The taxpayer informed the revenue agents that he had no records other than the books he gave to them. Actually on the trial he produced three other books which were also inadequate.

The taxpayer was a man of considerable frugality. He was married and had a daughter living with him. He convinced the Tax Court that his personal living expenses (added to the annual increase in net worth) were only $1,000 per year for himself, wife and daughter.

The petitioner's first attack on the finding of the Tax Court is based on his contention that the Commissioner made arbitrary determinations of increases in net worth that were demonstrated by subsequent findings of the Tax Court to be so unreliable as to withdraw from the determinations all presumption of correctness. The chief fallacy of this contention lies in the major premise. The determinations made by the Commissioner were neither arbitrary nor unreasonable under the circumstances of the investigation. The agents made a long and painstaking investigation of taxpayer's income. They were frustrated in their efforts to check the correctness of his returns by a complete absence of any system of accounting and a complete absence of records or supporting documents. As we said in Bryan v. Commissioner of Internal Revenue, 5 Cir., 209 F.2d 822, 827:

"When a taxpayer violates the mandate of the statute which requires him to keep proper records of his income, 26 U.S.C.A. § 54(a) and conditions are otherwise such that his taxable income may be determined in retrospect only by resort to circumstantial evidence of this character, he will not be permitted to rely upon his ability to conceal the detailed facts of his income and his fraudulent conduct to avoid the imposition of taxes which the collecting authorities may show to be lawfully due."

Here resort was had to the Banks in which taxpayer had accounts, to the real estate records, dealers who furnished supplies, purchasers of houses and brokers' offices; the taxpayer, his mother and his sister were repeatedly questioned; copies of his own financial statements were checked against original mortgages and security deeds. In point of fact, the only substantial errors demonstrated in the Commissioner's determination stem either from misinformation given by the taxpayer or by his mother or sister, except as to the value to be attributed to certain promissory notes owned by petitioner secured by real estate he sold. As to this item the agents took the full amount of the notes, which was neither arbitrary nor without support even though the Tax Court later found that 70 percent of the fact of these notes was the correct value. It was not arbitrary for the agents to consider as worth face value notes which the taxpayer had exacted when he sold the various parcels of real estate, and which he was currently collecting according to their terms, including interest of from 5 to 8 percent. The fact that at the hearing before the Tax Court credible evidence was adduced by petitioner for the first time to show that these notes were not worth full face value does not detract from the presumption of correctness that attaches to the Commissioner's other reasonably founded determinations. This is the normal office of such a presumption. It merely throws on the taxpayer the burden of showing with respect to each item that the Commissioner was wrong. Goldberg v. Commissioner of Internal Revenue, 5 Cir., 239 F.2d 316, 319. The fact that he carried that burden with respect to the value of the notes and the inclusion of certain assets which belonged to the petitioner's mother and sister, does not destroy the presumption of correctness of the remaining determinations by the Commissioner which are not shown by the taxpayer to be wrong.

Moreover, substantially all of the increases in net worth determined by the Tax Court were supported by affirmative evidence, much of which was in the nature of financial statements made by the taxpayer to the banks during the successive years. The Tax Court's opinion indicates a most painstaking effort to sift the evidence as to the specific pieces of property held at various dates. Whenever any evidence was introduced that cast any substantial doubt on the accuracy of the agent's report that Court readily accepted such proof in favor of the taxpayer.

Petitioner next attacks several specific findings of the Tax Court as being without evidence to support them. The three important findings are: 1. That taxpayer's claim that he had $20,000 to $22,000 in cash hidden in glass jars in the woods on the opening date of the tax period was not credible; 2. That taxpayer's contention that on the closing date taxpayer had an additional liability in the form of two notes for $85,000 to one Senn was not credible; 3. That the secured real estate notes of taxpayer were worth 70 percent of face value.

We need not dwell long on the story of the hidden cache of money. Aside from being a story that would strain the credulity of any reasonable trier of the facts,² the Tax Court had before it sufficient other evidence to warrant its rejection of taxpayer's uncorroborated story. Boyett v. Commissioner of Internal Revenue, 5 Cir., 204 F.2d 205; Archer v. Commissioner of Internal Revenue, 5 Cir., 227 F.2d 270; Kite v. Commissioner of Internal Revenue, 5 Cir., 217 F.2d 585. His income record, as disclosed by his tax returns, would not account for the saving of such an amount by January 1, 1942; the claimed cash was not included on financial statements furnished by taxpayer to the banks to establish credit as of January 1, 1942, or any subsequent statement; he was borrowing money at substantial rates of interest at the time he claims to have had this cache, such conduct...